Volumes yesterday were pitiful yet the markets dropped and across Europe and there was a large wave of uncertainty hitting equity investors.
This week will climax with the two day EU summit where investors are increasingly doubtful that any sort of meaningful resolution will be agreed. There’ll be lots of talk about a closer banking union and fiscal integration but nothing that the market is crying out for, which is a German backed firewall and new remit for the ECB to get the money printing presses underway. The lessons learnt from this whole project are that a currency union simply isn’t possible unless you have explicit rules in place in order for poorer nations to resist borrowing way beyond their means and ramping up their public sectors.
The eurozone crisis is here to stay I’m afraid and probably for years to come. Cyprus now becomes the fifth nation to seek a bailout, which comes as no surprise and most people in the market expect Greece to exit within the next 2 years. Their own test next comes at the end of July when they are set for their next big bond redemption in early August where they will likely need to tap into their bailout funds to survive. All this and their new Prime Minister isn’t even going to be at the EU summit this week! Well at least a new finance minister is due to be announced today after the newly elected one had to resign due to ill-health.
As long as Germany continues to refuse the launch of a Eurobond the crisis has no way of being resolved. It is so unlikely that they will ever guarantee the debt of poorer nations that the demise of the euro remains a highly likely outcome. It’s not often I praise politicians but in hindsight the only good decision Gordon Brown ever made was to keep us out of the single currency.
The equity markets are in respite mode this morning with the FTSE just in the black by some 10 points at 5460. Since the little turn lower after rejecting 5600 at the end of last week, the month’s gains no longer look so impressive. The FTSE has risen some 2.5% compared to 5% only a week ago. The 5300/5250 area is the major near term support whilst 5600 is resistance. As the volumes yesterday indicated we are going into the summer months now and so there could be some interesting moves in the weeks ahead.
Economic data comes in the form of consumer confidence numbers. Already we’ve seen a surprisingly strong figure from Germany which is lifting stocks so far this morning, but later from the US consumer confidence is expected to decline for the fourth month in a row.
The single currency remains the dog of FX pairs and suffered more losses yesterday. This morning flirtations with the 1.2500 level are keeping any prospect of a bounce at bay. It looks like only a completely unexpected outcome from the summit this week will turn the sentiment towards the euro, but for now the bears remain in control. Near term support and resistance is seen at 1.2470/40 and 1.2540/70, 1.2600 respectively.
Gold continued its rally, $10.35 to $1584.05 largely on safe haven demand as Europe still looks far from coming up with an answer for its debt struggle. Some short covering after last week’s decline might have also played a role. Amid signs the central bankers have opted for restructuring rather than expanding their balance sheet, plenty of uncertainty remains on the cards. This morning the precious metal is flat at 1583 and near term support and resistance is seen at 1565/54/43 and 1596/1604 respectively.
The WTI crude prices resumed their slump yesterday on the back of increasing nervousness in the markets that a solution to the debt crisis in Europe will be found any time soon. In the meantime Tropical Storm Debby did less damage than initially predicted for oil producers in the Gulf of Mexico, not helping the buyers either. Overall, WTI lost 55 cents to $79.21 and this morning the bears are dragging crude lower once again to 78.90 at the time of writing.